Will fracking make economic sense?

So having familiarised ourselves with the process itself, let’s switch our focus to some of the economic arguments for and against shale gas extraction. Cambridge-based Michael Grubb is a Professor of Energy and Climate Change at University College London.

James - So having familiarized ourselves with the process itself, let's switch our focus to some of the economic arguments for and against shale gas extraction. Cambridge based, Michael Grubb is a professor of energy and climate change at University College London. Thanks for coming in. Michael, before we get to fracking, could you start by outlining the nature of the energy security crisis we face at the moment, because that's the reason that this topic is back on the table.

Michael - Sure. Well, obviously we're in a pretty serious energy crisis, which is not unknown in the last 50 years. This time really, we actually had a period of pretty low investment globally in gas because gas prices actually were pretty low for a decade or so. Coming out of COVID, demand surged, particularly in Asia. There was already a bit of a supply crunch. And then of course we had the Russian invasion of Ukraine. Russia as a major supplier to Europe and that drove the gas markets into the frenzy, that we have seen over the last year. The UK , it feeds largely on the international markets, but that means we're competing with Asia very directly for what gas is available. That has made it extremely expensive. The UK had very little storage, almost no storage to fall back on.

Michael - I think the other thing to say is as the war has dragged on, we've seen gradual tightening of exports from Russia declining close to zero now. We had explosions on two gas pipes last week and also the energy industry as a whole is now really nervous. So they're trying to contract ahead, a year ahead or two years or more at very high prices just to make sure they can get something. So this crisis is not going away any time soon and that I think is what's really sinking in with people now .

James - We're talking about this because the moratorium on fracking has been lifted. Can you tell us a bit about why fracking was banned in the first place?

Michael - Yes. I think, it's useful to look back and recognize that there was a huge wave of enthusiasm about fracking, at least in the industry about a decade ago. There had been pretty much a technology revolution in the US and there was lots of hype about if Europe was gonna get in on the act. Actually most of that ended in disappointment across much of Europe, including the UK. There were some pockets of potential fracking, but most of the industry concluded it wasn't gonna be very much, it wouldn't be very cheap, and it really wasn't worth the risk. So actually it was largely industry backed away. Some companies kept going where they were committed specifically to that and I think one of the factors which did then knock that back ,aside from the wider environmental concerns on climate change was indeed earthquakes as well as in some other regions reports of, of chemicals leaking into water supplies. So I think the general environment was actually, this is not remotely what it was hyped up to be, and there were problems and risks and political opposition and, and the government simply decided it would be simpler to ban it.

James - So just to clarify, you've mentioned how particularly in the United States, fracking's enjoyed some success. The main reasons that we couldn't replicate that success in the UK, that's to do with us not knowing exactly how much shell gas is under the surface to the UK.

Michael - Well, as part of the, a decade ago when there was a lot of excitement, there was a fair amount of mapping of the broad resource. But I think it's important to stress you just look at a map. The US has a vast land surface compared with the UK and a lot of it is much less population. That's one thing. There's still very much the US industries concentrated on some particularly good resources. Nothing in the geological mapping suggested we had anything that was gonna be that good, big, cheap, or easy to access. Land in Europe as a whole tends to be a lot more expensive than in the US. One final factor is the legal regime was different. So people who had land, in the US, they owned a gas underneath. It gave them a strong incentive to put up with disruption if they got the money. And that's not generally the situation here. So there were lots of reasons why fracking never took off, in Europe in the way that it did in the US.

James - So I suppose what's different now? Could the lifting of the moratorium, this is the big question, alleviate the surge in energy prices being felt here in the UK at the moment?

Michael - Well, I think there's four challenges frankly that shale is gonna face. There's timescale, there's cost, there's markets and there's, there's risks. The timescale is determined. Partly you have to drill dozens of holes to really know what's there in detail and to establish what you can actually inject, how much it's gonna take, et cetera, et cetera. So there's going to be quite a lot of drilling to really establish what's there that you may be able to get at and then the cost of getting at it. Obviously it is a lot easier to drill a hole down into a pure reservoir of gas and it comes up in a pipe than it is to go through the processes, that's just been described to you, you do need the factors that we mentioned, fairly cheap land, fairly easy access and so forth.

Michael - Third, that probably makes it more expensive than normal gas resources, but it could still be economic at these gas prices for sure. But bear in mind, the timescale implied in there . It's gonna take several years to get substantial supplies. And one of, of the reluctance of the industries, they're worried that they might invest a lot, maybe upset a lot of our people, just when they can start getting significant supplies, the gas price crashes, again, they don't know. The third thing is markets, because these are global industries, would we be saying to companies, Sure, go ahead and frack and sell it on the international markets. Well, the volume that we would sell would make virtually no difference to the global price or therefore to our price unless we actually kind of forced companies to sell it to Britain first at a less economic, less attractive price.

Michael - And that of course, is not a way, you're gonna get huge enthusiasm in the industry. So there's a bit of a paradox there, which is why most people say that whatever we do do with fracking is not actually gonna affect the cost of gas in the UK . And then finally, there are the environmental risks and whether something goes wrong, there's a that basically does create a bit of a backlash. I'm not sure the industry is that keen to jump in here. For the most part, some companies, a few specialist companies are that have put all their eggs in that basket.

James - So it looks like the odds have really heavily stacked against fracking. I just wonder if something like for example, today we will, the objective of this program has to been to sort of remove the politics from this quite contentious topic. But the reason we're having this discussion is because politically it's, it's, it's very topical. And I wonder if something like the national Grid coming out today and saying that winter power cuts might be a, a worse case scenario in the coming months, whether that might mean that the government sees fit and, and it it gives the companies the assurances to make them start during. Do you see that as a possibility that the politics has a role over the economics?

Michael - Well, I think for whatever reasons, clearly the government is signaling that it's in favor of fracking. It wants it to start up again. It's pushing it quite hard. There's obviously an instinctive appeal about trying to extract your own energy resources. I mean it will have consequences,, internationally as as well. And, implications. I think it's actually, I must have been a little ironic hearing the news in the last couple of days about lights might go out because of this. I actually for three years chaired the government committee on electricity security, um, called electric committee expert committee on EMR, And raise this question about we're assuming that becauyse we've got enough gas plants, therefore our electricity will be secure. Isn't that an assumption we should look at? And I was pretty robustly told, no, this is an electricity committee. Uh, we've got enough diversity in gas. You didn't worry about gas suppliers. So Michael stay like in the box of electricity. But you know, energy markets have always had a capacity to bring us shocks

James - And that's where we have to leave it. Thank you very much, Michael Grub University College London.